Brazil: Economy shrinks at record pace in Q2 on Covid-19 blow
September 1, 2020
GDP nosedived 9.7% on a seasonally-adjusted quarter-on-quarter basis in Q2, severely below the 2.5% contraction seen in the first quarter, as the Covid-19 health crisis and associated social distancing measures slammed activity. The result marked the worst reading on record, coming in slightly below market analysts’ expectations of a 9.4% decline. On an annual basis, economic activity plummeted 11.4% in Q2, notably down from the previous quarter’s 0.3% contraction.
The quarterly downturn largely reflected heavy contractions in the domestic economy. Household consumption fell 12.5% in the second quarter, a sharper contraction than the first quarter's 1.9% decrease, as containment measures constrained non-essential spending Moreover, government expenditure plunged 8.8% in Q2, contrasting the previous quarter’s 0.2% expansion. Fixed investment also swung to contraction, dropping 15.4% in Q2 and contrasting the 2.3% increase recorded in Q1, amid the highly uncertain backdrop.
On the external front, exports of goods and services increased 1.8% on a seasonally-adjusted quarterly basis in the second quarter, which contrasted the first quarter’s 1.3% contraction, largely reflecting upbeat exports of commodities, food products and oil. Conversely, imports of goods and services nosedived in Q2, contracting 13.2% (Q1: +0.8% s.a. qoq) and indicating a significant reduction in domestic demand.
Looking ahead, the economy is set to shrink markedly this year as the pandemic deals a heavy blow. The external sector will reel amid the collapse in global demand, while social distancing measures are set to depress household spending and investment activity. A prolonged health crisis and political tensions further cloud the outlook.
Commenting on the outlook, Alberto Ramos, economist at Goldman Sachs, reflected:
“We expect real activity to continue to recover in coming months supported [by] the gradual and selective easing of mandated social distancing protocols and lockdowns, easier domestic and external financial conditions, additional fiscal and lagged monetary stimulus, recovering commodity prices, and firming global growth. However, a still very complex domestic covid viral picture, very weak labor market, and expected phasing-out of some of the current fiscal support measures should soften the pace of the recovery. The strong May-June and July prints have generated a large positive statistical carry-over for growth in 3Q2020.”
Moreover, further commenting on the outlook for the Brazilian economy, José Carlos Sánchez , senior economist, and Alexis Milo, chief economist and head of research, both at HSBC, noted:
“Overall, we think that the balance of risks for Brazil’s activity has improved recently due to the relatively contained fall in Q2 as well as to the recovery seen in some industries during June and July. […] Although we are not expecting further shutdowns or massive lockdowns, the fact that COVID-19 contagion rates are still high could lead to an uneven recovery. Our 2020 GDP forecast stands at -7.3%, and we recognize a slight upwards balance of risks for activity from this number. We still think that the main challenges are on the policy space, which looks already constrained.”
Author: Hanna Andersson, Economist